spent his
at 2.25 percent on Wednesday, citing a more resilient economy and containment of inflation pressures.
“In the current situation, the governing board believes that the current policy rate is at about the right level to keep inflation at around two percent while helping the economy survive this period of structural adjustment,”
said Bank of Canada Governor Tiff Macklem
in his opening remarks. “However, uncertainty remains high and the range of possible outcomes is wider than usual.”
Macklem said if the forecast changes or a new shock arises, the central bank is ready to respond.
Wednesday's decision was widely expected by economists after better-than-expected growth in the third quarter and signs of improvement in the labor market.
The Bank of Canada had forecast third-quarter gross domestic product (GDP) would grow 0.5 per cent, but Statistics Canada said it rose 2.6 per cent. This came on the back of a better trade balance compared with the second quarter, when exports fell sharply and the economy contracted 1.8 percent. However, this quarterly growth is expected to be revised as Statistics Canada dealt with incomplete trade data due to the US government shutdown.
“It was much stronger than we expected, but largely reflected the volatility in trading,” Macklem said. “Final domestic demand remained flat during the quarter.”
Macklem said the bank expects domestic demand to rebound, but GDP growth is likely to remain weak in the final quarter before accelerating in 2026.
The Bank also took note of Statistics Canada's higher adjustments to GDP for 2022, 2023 and 2024. Macklem said this may explain some of the persistence seen in the more recent data.
Looking ahead, uncertainty is expected to remain due to the upcoming renegotiation of the Canada-United States-Mexico Agreement (CUSMA) and continued volatility in GDP data.
“There is also uncertainty about how the Canadian economy will adjust to higher tariffs,” he said. “The volatility we are seeing in trade and quarterly GDP makes it difficult to assess the underlying momentum of the economy.”
Canada's unemployment rate stood at 6.5 percent in November, down from a peak of 7.1 percent in September. The central bank said the labor market in trade-affected sectors remains weak and hiring intentions in the broader economy are expected to remain subdued.
Headline consumer price index inflation was 2.2 percent in October, and the central bank estimates core inflation is still around 2.5 percent, while headline indicators are in the 2.5 to three percent range.
“We will see some volatility in headline inflation in the coming months, reflecting the temporary GST/HST holiday on some goods and services a year ago,” Macklem said. “Seeing this instability, we expect the ongoing economic contraction to roughly offset price pressures associated with trade reconfiguration, keeping CPI inflation close to the two percent target.”
The federal government's recent budget saw an increase in government defense spending as well as public and private investment. Macklem said it would take some time to see the impact of the measures, but the central bank expects them to have an impact on supply and demand and will include them in its next monetary policy report in January.
